Circuit City Falls Further: 'Bring Out Your Dead'
Anyone remember the famous Monty Python skit? See it below:
Circuit City (CC) is the old guy being carried by John Cleese.
Circuit City Stores reported a wider quarterly loss and withdrew its financial outlook on Monday as the electronics retailer reviews its business, sending its shares down 10% to $1.26 a share.
Last week brought the overdue firing of CEO Phil Schoonover, also said it would suspend store openings beginning with its 2010 fiscal year to focus on turning around its operations.
Circuit City has reported losses for five of the past six quarters, and sales have dropped for more than a year. Q2 net loss was $239.2 million, or $1.45 a share, compared with a loss of $62.8 million, or 38 cents a share, a year earlier. Total sales fell almost 10% to $2.39 billion and same-store sales, fell 13.3%.
A year ago, in a post commenting on then-rumors that Sears Holdings' (SHLD) Eddie Lampert might make a bid for the company, I said, "Lampert, based on his past history, would more likely wait for these buffoons to run it into bankruptcy and pick it up for a fraction of today's price".
I doubt Lampert wants it, but if he does, bankruptcy is right around the corner..
Disclosure ("none" means no position): Long SHLD,None
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This article has 234 comments:
- phil'spal
- 88 Comments
Sep 29 04:24 PM- billddrummer
- 491 Comments
Sep 29 04:39 PMI'll bet the bankers that put together their lending facility are scouring the loan documents to see whether there's any way they can get out of it.
I looked at the filing, and it didn't appear that the lending group put any financial covenants in the agreement. Which makes sense to a degree, because they were already losing money when it was booked. But with credit markets frozen and banks looking at liqudity pressure, I'd be surprised if the lending group (includes BAC and JPM, among others) didn't put some stops on draws.
When that happens, vendors will stop shipping, and CC will be done.
- jerico
- 14 Comments
Sep 29 05:54 PM- billddrummer
- 491 Comments
Sep 29 07:44 PMMy comment from last week about the company's balance sheet is absolutely what happened:
seekingalpha.com/user/...
True to my prediction, cash is down, borrowings are up, and market cap fell to the basement over the previous year.
I'll bet the bankers that backed the credit line are looking for loopholes in the agreement. But it doesn't seem to me that financial metrics were part of the SEC filing describing the deal:
www.secinfo.com/d14D5a...
I'll bet they wish they had.
- AT57
- 12 Comments
Sep 30 10:32 AM- billddrummer
- 491 Comments
Sep 30 12:07 PMWondering what they were taking while the company was falling into this abyss?
If you believe management (questionable) CC will revive itself going into the holidays. Staffing and in-store stock will be up for the season, pricing will be competitive, marketing will be targeted and effective, and the company still has full support of its vendors.
The lack of financial covenants on the $1.3 billion credit facility is a testament to how much pressure bankers had on them to get deals done a year ago, despite looking at a borrower with falling sales, negative FCF, non-existent EBITDA and no strategic plan. The loan got approved anyway because it's overcollateralized with inventory.
But consumer electronic inventory isn't worth much in bankruptcy court. Which is a very real possibility if the holiday season turns out as grim as it seems it might.
And to AT57,
The first directive by Schoonover was to trim back ordering flat-panel TVs during the 2006 holiday season, which led to lower sales because stores were out of stock. The decision to fire the higher paid salespeople was the second.
- AT57
- 12 Comments
Sep 30 12:23 PMWhen you sacrifice customer service in a retail business to save a few dollars, you usually pay for it tenfold. If the buying experience for the end user at CC was at all better than average - their main competitor, BB offers average service, at best - they would not be in the fix they're in.
- billddrummer
- 491 Comments
Sep 30 01:52 PMwww.bloomberg.com/apps...
It won't be long, now. Stock is trading at $0.72.
- phil'spal
- 88 Comments
Sep 30 02:15 PMGood job on your research on their debt situation! Given CC's current state, is it within the realm of possibility that the lending facility could make that available money suddenly unavailable and even call the outstanding debt? If the penalties that they'd face are easier to take than the lickin' that they'd get by riding it out, the endgame could come a lot sooner than later.
- billddrummer
- 491 Comments
Sep 30 04:25 PMThanks for the kind words. I bet the bankers are looking at the deal now, to determine what constitutes a Material Adverse Event (one of the triggers for technical default). Hiring the restructuring firm may be one of those events, but the lawyers will have to fight it out. Losses beyond what the company expected could also be considered material. Or, the impairment charge of $73 million points to a potential for additional writedowns on the balance sheet, which would further impair the capital position. Or, having the stock trading at such a low level (essentially a penny stock now).
This is going to be interesting, but I don't think it will take too long to figure out what's what.
I wouldn't be surprised if a notice goes out by the end of the week. On the other hand, maybe they can work out an arrangement that will allow them availability on the credit line through the holidays, with an orderly liquidation after the Christmas season.
That's what CompUSA did last year.
Time will tell, as it always does.
- Legend
- 1 Comment
Sep 30 05:31 PMGet'ER going circuit
- billddrummer
- 491 Comments
Sep 30 06:22 PMOnly if the banks don't curtail borrowing (which is happening with blue chip companies like McDonald's), customers flock back to the stores (which is a reversal to what's going on now), and the company can figure out how to sell stuff at a profit (which they haven't done in a year and a half).
The track record doesn't support your view.
- phil'spal
- 88 Comments
Sep 30 07:44 PMTo retailers, the 3 months coming up are known as the 'Golden Quarter'. Normally, the overall retailing year is made or broken on the results of that time period. That's why effort becomes focused to the point of obsession on getting the sales done at that time of the year. That's a heck of a time to 'get back to basics' and 'accelerating the company's turnaround'. It's going to be tough enough to do one job right. What happens to every job that's done under system overload? When your house is burning down around you, it's a little late to go shopping for a fire extinguisher.
They've already booked their holiday season buys and the suppliers must be excreting pickles. If they deliver, they could get stiffed big style. If they hold the product back, they have to scramble to off-load it somewhere else.... or CC gets put on the 'cash up front' list. Once on the list, whatever inventory and cash flow control CC may have would unwind immediately. Lost control = lost sales = lost quarter = last quarter. If there's a catalyst anywhere here for a rebound, I'd love to see it.
- BigM52
- 1 Comment
Sep 30 10:11 PM- BSexposer
- 31 Comments
Oct 01 10:02 AMDisclosure ("none" means no position): Long SHLD,None"
You are so obviously biased here - you are saying BK is "right around the corner" but you've done NOTHING to determine what their liquidity situation is (i.e., the status of their lending facility). So your "right around the corner" call is uninformed at best. SHLD is a piece of garbage, BTW, it PPS gets propped up by Lampert's hedge fund pals - talk about hypocrisy, this company ALREADY UNDERWENT BANKRUPTCY - good luck with that one!
- billddrummer
- 491 Comments
Oct 01 12:00 PMPlease read the link above that takes you to the filing on the credit facility.
Highlights:
No financial covenants;
Draws limited to inventory purchases and issuing letters of credit to suppliers;
Draws to support Canadian purchases are to be repaid prior to draws to support domestic store support;
Loan draws are unrestricted--company can use loan proceeds as it sees fit;
Base rate is either Libor or prime + an index--which is confidential
So from a liquidity standpoint, it looks like the credit facility will do the job of keeping them liquid through the holidays. What happens after that is anyone's guess.
- billddrummer
- 491 Comments
Oct 01 12:02 PMI realized after I posted that I had contradictory data in the highlights section. Draws can be used for general corporate purposes as long as they don't violate Reg U or X governing board of director conduct.
My error.
- BSexposer
- 31 Comments
Oct 01 12:56 PM- billddrummer
- 491 Comments
Oct 01 01:32 PMThanks for the encouragement. I've been watching this company for nearly two years, and it's amazing to me that they've continued to stay in business.
If anyone remembers, last year, the company lost money during the holiday quarter (that fact wasn't announced until full-year earnings came out). Now, it's one thing to post losses during the second quarter, but when you can't make a profit during the peak season, it spells doom in large black letters.
If CC isn't profitable during the holiday season, I don't see many options remaining except liquidation.
And to BigM52,
The 'bailout' package is looking more and more like a feeding trough for any troubled business or industry--how did the auto industry get $25 billion to finance 'alternative energy development' when they're the ones who are supposed to be doing the engineering? What about the armies of designers, engineers, computer wizards and physicists who already work for the automakers? What have they been doing all this time--designing more comfortable seats?
If I were a taxpayer (I'm in a bracket that doesn't pay much), I'd be livid that companies who fail to fulfill their own self-stated goals get to belly up to a feeding trough that I'm filling with my tax dollars.
I'm just livid because of the hubris of CEOs that presume government subsidies are effective business strategies.
I'd rather see the CEOs roll up their $250 shirt sleeves and work on improving the way their companies run. Instead, it seems like all they have to do now is call their congressman, drop a check in the mail, and wait for the slop truck to deliver the dough.
But that's a tangent to your original question, and I apologize.
If the government is smart, it won't allow companies to partake of bailout dollars unless the company is vital to the economy. CC is not vital to the economy. It's a marginal retailer with a lot of poorly run stores.
The principal thing is that the credit facility is in place, and available as long as the company is in business. So it can use the money to cover its bills for as long as the facility stays available. But the banks have more invested than the stockholders do, so it's in their best interests to keep the business alive. In fact, you might be better off buying the debt, instead of the stock. At least you'd get some yield. But wait, the debt isn't for sale.
My bad.
- cc4everhere
- 1 Comment
Oct 01 01:43 PMJames Lubary dont you see this??? Let's give this man a chance!!!!!
- BSexposer
- 31 Comments
Oct 01 09:48 PM- billddrummer
- 491 Comments
Oct 02 12:01 PMI wasn't aware of the details behind this loan program, thanks for enlightening us.
As far as the idea that the carmakers are GSEs, I'd call them MSE's--market sponsored enterprises. Their debt is trading at huge yields (20%+ is huge), they're still cranking out losses every day, but the market continues to buy it.
If the government offered to buy up all the debt and issue Treasuries instead, then I'd call them GSEs. But that's just me.
- quickdraw
- 14 Comments
Oct 02 01:25 PMSurely no sane, rational person out there really believes that CC will have even an average holiday season this year ... they live in a world of 'make believe' where common sense business and the customer's perception of any shopping experience do not matter.
The Fat Lady is ready to sing at CC ... listen ... you can hear her warming up in the dressing room right now!
- billddrummer
- 491 Comments
Oct 02 02:23 PMWith CC trading at 0.66/share, it seems like the market has already got the fat lady on stage.
Competitors are worried that CC will do stupid stuff on Black Friday to gain traffic, like sell big screen TVs for $199.99.
That happened in 2005, I believe. The discounts were huge, nobody made a profit until deep into the season, and while sales held up, margins got crushed.
With a grim holiday season staring down on the retail landscape, it's not beyond the realm of possiblity to expect a wounded animal (CC) to lash out in a futile attempt to save itself.
I don't think it will work But the net result will be falling margins across every category the company competes in. Which isn't good for anyone in that business, large or small.
- quickdraw
- 14 Comments
Oct 02 03:15 PMA correct perspective and historical reference! I do predict that traffic-drivers in the video realm will see a margin bloodbath ... in anticipation of the 2009 digital conversion retailers will be ready to draw their guns at the competition's first blink. Possible profit havens such as Blu-ray will be sacrificed to the marketing gods as well ... even the sacred accessory categories like connectivity and mounting hardware will be offered up.
After all, there's no 'second place' in a gunfight ...
Interesting to note that in the the recent financial statements that CC's audio category business is way down. Gee, I wonder why? Shop for a decent home audio receiver at most stores, and you'll find the displays are non-functional. They don't even try. Hmmm ... there must not be any money in home audio, according to the cubicle-sitters who steer the company ship.
I do not believe that Circuit City will be a major contributor to the intensity of the fray during holiday season 2008. They will react in desperation, as you suggest, but moreso within the context of the drowning victim who clutches desperately at anything that appears to be above water. I don't think CC's pockets are deep enough to survive even a few bubbles ... All eyes should be focused upon Wall Mart ... they are the marketplace Goliath this year.
- NotherMember
- 2 Comments
Oct 02 04:03 PM- billddrummer
- 491 Comments
Oct 02 04:25 PMYour experience seems unique. Although the company did sell $2.8 billion in goods and services during the quarter. So they haven't alienated everyone--if they did, the sales would fall to zero.
To Quickdraw,
Thanks. And as for your comment about audio, there are excellent margins in audio products. If they're sold properly. What you've identified is a clue to how the business is currently being run: If you have nonfunctional displays, you can't demo the products. And without demos, you can't sell audio.
The company seems to have forgotten the basic blocking and tackling skills that comprise 'effective retail selling strategies.'
We'll see how things play (pun intended) out.
- CanadaD
- 12 Comments
Oct 02 05:00 PMDoes a failure of the US Company automatically mean the Canadian subsiduary (InterTan) will fail too?
They've had many problems up here, and have been up for sale for over a year, although I'm not sure they've had any offers. They were profitable in this last quarter, but apparently it was the result of a $4M rebate from the government or something?
Any thoughts or ideas?
Thanks,
CanadaD
- billddrummer
- 491 Comments
Oct 02 05:39 PMInterTAN is a wholly owned subsidiary and joint borrower on the credit facility. If CC were to file BK, the subsidiaries would be included.
The profit was attributable to a tax credit and favorable currency exchange transactions. That also helped out the sales comparisons, because comp sales were up 11% almost entirely because of a devalued dollar compared to a year ago.
The chain has been on the block since late 2006--its possible sale was mentioned in the 2006 annual report (FYE 2/2007). But I believe you're right in that nobody wants it.
- billddrummer
- 491 Comments
Oct 02 05:59 PMI was wrong in my previous post. Apparently, local currency sales were up 11.2% after all, partly because of better sales, partly because of currency fluctuations. A goodwill credit of $4 million helped with the net profit--although the gross margin sank over 4 points.
Sorry. I'm so surprised by good news from this company that I miss it.
- CanadaD
- 12 Comments
Oct 02 06:23 PMThanks for the insight, the Canadian Press is asleep on the status of the operations up here. Because the stock is only traded down south, they're oblivious to what could amount to several thousand jobs...
You seem to have really done your homework on this one.
If you had to call it, on a scale of 1 to 10, what's the likelihood CC will be around come March?
- billddrummer
- 491 Comments
Oct 02 06:35 PMThank you for the kind words. I've been watching this slow motion train wreck for nearly two years.
And I'd give the company almost no chance (less than 20%) that it will be around as it looks today in March.
The Canadian chain seems to me to be a relatively viable business. The problem I see is twofold: True, sales were up, but margins got killed. You can sell yourself out of business if you don't watch it. The management team applauded the Canadian group for holding up the profit end despite falling gross margins. That's the first thing.
The second is this: If someone does purchase InterTAN, they won't have access to the buying power that CC does, unless it's a bigger company. (BBY wouldn't be a good fit--the stores are too small and generate too little revenue/location. I've never seen one, but to me it sounds like the units resemble RadioShack.) Limited buying power means higher costs for product, which means lower margins unless you raise your prices. In the current environment, raising prices is exactly the wrong thing to do if you want to maintain your market share. People are voting with their wallets, looking for the cheapest way to meet their needs. (At least here in the US.) If that's happening in Canada as well, an acquirer would need to strike purchasing arrangements with larger players to preserve margins without resorting to raising prices.
So it's an interesting problem to be sure. I look for a CC with markedly fewer stores and a regional, rather than national, footprint after the holidays.
- billddrummer
- 491 Comments
Oct 02 06:39 PMOne way this could work is if CC spins off the retail side (store network) as an operating entity but retains the distribution channel. Then, the Canadian operation could manage itself (apparently it did OK on its own) but continue to benefit from the financial backing of a CC-sponsored credit facility and purchasing power, among other things. That would also unlock the value of the land holdings in Ontario. There's a large distribution center that CC has owned for some time. Throw that in, and you've got some hard assets to play with.
Just a thought.
- phil'spal
- 88 Comments
Oct 03 12:07 PMIt's a good thought, but there's only so much margin to go around between the supplier and the end user of the product. Splitting the two branches increases creates much more admin expense.
Intertan's market niche is much different than CC's. Store size is more boutique, much smaller footprint than the big box CC profile. They have a network of dealer stores in smaller towns. Dealers are normally more diverse retailers that cherry pick their product and are not full line stores. Intertan's product mix is also much different. They're Radio Shack stores with a different sign above the door. Parts and accessories, gadgets and gizmos are what are giving them their margin, not big ticket items. Intertan was originally the international operations of RSH. They depended heavily on RSH's buying power. Today, they depend as heavily on CC's buying power. As a stand alone retailer, they'd have a tough time without the buying clout of the bigger players, as you've said.
Here's something to consider: Radio Shack experienced some severe internal problems a couple of years ago, but at some point, I'm sure that they'll get back into Canada with all of the leverage of their US operations behind them. They have a pretty good eye for a bargain too. It wouldnt surprise me to find out that they're waiting for the final death rattle at CC. At that point, they could basically pick up the whole retail operation for pocket change. It's a great fit too. After all, they designed and developed Intertan's infrastructure in their own image. The Canadian operations would do a lot better than they are presently in a structure that is much more similar to their own than CC's.
- CanadaD
- 12 Comments
Oct 03 01:30 PMUnfortunately, this poses a huge strategic issue as a result of the "flip-flop" of the trade names...
We really question whether the Canadian buying public is ready for another name change...
The confusion that resulted when both CC and RS were here simultaneously, (albeit RS 's operations were miniscule by comparison - 30 stores or so) was disasterous for both brands.
With all of the competion in CE, it seems the only part of InterTan's operation that is successful is their small town dealer base. (Who I might add seem to be leaving like rats from a sinking ship...)
At this stage of the game are small store electronics retailers (other than perhaps high-end boutique and/or custom home operations - which InterTAN couldn't be further from) a thing of the past?
- billddrummer
- 491 Comments
Oct 03 01:33 PMThanks for the data on InterTAN. I think you're spot on with your view that when CC does go down (.60/share today) and the InterTAN piece is unwound, RSH would love to get it back. That would bode well for RSH, because they could immediately broaden their footprint in North America without having to go to great lengths acquiring sites, negotiating leases, etc.
That's similar to the deal that BBY did by buying up some CompUSA leases on closed stores that were close to locations already scoped out for new BBY stores. BBY bought 17 leases and will include those stores in the fiscal 2010 store opening strategic plan. Lots cheaper than starting from ground zero.
- billddrummer
- 491 Comments
Oct 03 01:56 PMDepends. If there isn't much competition in the market segment, the RS idea could work.
What if CC sells the brand name too? That way store branding would remain in place and it wouldn't be as confusing.
I believe there is a place for small footprint accessory stores in good locations. The ultimate in 'grab and go'--cabling, parts, batteries--even though inventory management is a nightmare (try sorting 50 different kinds of batteries when your shipments arrive).
And from your comment, it doesn't seem likely that the existing network could be converted to boutique style stores without major capital infusions--and there's no guarantee it would pay off,
RSH has done reasonably well in the US, although they were starting from a big hole. If they stay focused on the accessory side, the company should be fine. But I've noticed a trend toward stocking more full-product items (TVs,GPS units) which erode margins 2 ways: They carry lower margins to start with, and higher average selling prices. And with products like those, it helps to have staff that knows something about them. I get the impression that RSH stores don't have staff that's knowledgeable about those items. Many of them are really good at parts and accessory recommendations, though.
Interesting to see what becomes of all of this.